Jerry Brown Says California Budget Deficit May Hit $28 Billion

Wasn't it just a few short months ago California balanced its budget, plugging a $19 billion hole? Indeed it was. Nonetheless, Jerry Brown now warns of a $28 billion hole for the next fiscal year and the state controller warns of more IOUs.

Please consider California Deficit May Reach $28 Billion as IOUs Loom

California�s budget gap may widen to $28.1 billion over 18 months, according to Governor-elect Jerry Brown, who takes charge of the most-populous U.S. state next month. A cash shortage may force the use of IOUs by July, Controller John Chiang said.

The deficit estimate takes into account a $2.7 billion drop in projected estate-tax receipts, and compares with the most recent forecast of a $25 billion gap for the period, Brown said today at a public meeting of state officials. The cash accounts may be short by $2.3 billion within eight months, Chiang said at the meeting in Sacramento.

�I don�t want to say it, but this could mean IOUs and more tax-refund deferrals,� Chiang said.

Brown, a Democrat who takes office Jan. 3, faces a widening gap after negotiators closed a $19 billion deficit for the current fiscal year, which ends in June.

�California is facing a very serious budget crisis,� Brown said. �This latest increase comes from actions that are taking place in the Congress that will have an effect on California.�

The extra yield investors demand above top-rated debt for 30-year general obligations from California issuers reached 105 basis points yesterday, the most since the budget was enacted in October, Bloomberg Fair Market Value data show.

California allegedly "closed" a budget gap of $19 billion this fiscal year and now faces a $28 billion gap next year.

However, and as before, Democrats do not want to cut services and Republicans do not want to increase taxes. I have the perfect solution: Let's throw a party and give everyone cookies like president Obama just did, with Republicans tooting their party horns in agreement.

Oh wait. I forgot California, unlike the US has to have a balanced budget. In that case, let's rely on the ol' Arnold Schwarzenegger Play, this time on steroids, and "balance" the budget for the next three years by floating $3 trillion in bonds all at once.

Hedge funds and pension plans should love the idea seeing that they chased 3-year Walmart bonds a few weeks ago yielding a mere .7%.

Value is for sissies, at least until the bond market revolts (as it is now), with 3-year treasury yields at .94% and rising. This makes saps out of buyers of those Walmart bonds.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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